Findings from this year’s Florida CEO Trends survey confirm that 2008 was a difficult year for Florida’s economy. Many of the chief executive officers of Florida’s largest corporations say 2009 may be just as bad. They expect the U.S. economy to deteriorate in the year ahead and Florida’s economic growth to be hampered by the national economy, a soft housing market and the global financial squeeze.

The annual statewide survey has tracked changes in CEO perceptions, plans and actions since 2000, and findings from this year’s survey offer insights into how Florida’s CEOs are dealing with deteriorating economic conditions.

See Florida CEO Tends - Survey Results and Viewpoints for detailed survey responses and viewpoints from 16 of the state’s top executives.

2008 earnings disappoint; predictions for 2009 pessimistic

Florida CEOs ... » Anticipate slowdown in the U.S. economy » Expect housing values in Florida to stabilize » See Florida’s economy hampered by soft housing market, credit squeeze and national recession

Multiyear Trends » Rising healthcare costs » Increasing emphasis on the Florida market » Incremental growth in international trade

Emergent Issues » The economic outlook » Coping with high energy costs

As they approach the end of 2008, many of Florida’s CEOs report disappointing earnings. Almost half (48%) of the survey’s respondents say they will fall short of their revenue goals for 2008. This figure is up from 30% in 2007 and 16% in 2006. In fact, it is the highest percentage of CEOs to report disappointing earnings in any Florida CEO Trends survey. The overall trend suggests that Florida’s economy began to decelerate two years ago.

Revenue shortfalls are being experienced across a wide spectrum of Florida’s economy. Doubting they will meet their revenue goals for 2008 are majorities of CEOs in agribusiness, business associations, business services, construction, education, energy, entertainment, hospitality, human resources, media, real estate, restaurants, retail trade, wholesale trade and transportation. The industries in which organizations are on track to meet their goals are limited to government, healthcare, insurance and manufacturing.

Many CEOs are also pessimistic about their organizations’ anticipated earnings in 2009. Over half (55%) predict that their organization’s performance in the upcoming year will be either about the same (37%) or worse (18%) than in 2008. The percentage expecting to do worse is the highest ever in the Florida CEO Trends survey.

Projections for earnings in 2009 vary widely across economic sectors. Predicting that their organization’s performance in the upcoming year will be better than in 2008 are majorities of CEOs in business services, business associations, education, finance, government, healthcare, hospitality, human resources, insurance and transportation. On the other hand, worse performance in 2009 relative to 2008 is anticipated by at least 20% of CEOs in construction, education, energy, entertainment, manufacturing, real estate, restaurants and wholesale trade.

Housing and credit top two factors impacting state’s business climate

The less-than-positive expectations of CEOs for the upcoming year are based on concerns about three factors impacting Florida’s economy. Asked what one factor is having the most impact on Florida’s current and future business climate, CEOs cited the state’s housing market (55%), the credit crunch (28%) and a possible recession (10%). Majorities of CEOs in almost every economic sector pointed to the state’s housing market as the key factor impacting Florida’s business climate.

» Housing Starts Authorized by Building Permits

Source: U.S. Census Bureau

The 2006-2008 falloff in residential construction is far greater than the two slumps Florida experienced in the 1980s.

Moreover, almost half (45%) of CEOs report that the state’s housing market has negatively impacted their company’s employee recruitment or retention efforts. Negative impacts from the housing market were reported by at least half of CEOs in agribusiness, energy, healthcare, hospitality, manufacturing, media, professional services, retail trade and restaurants.

State data on housing starts (see chart above) reinforce the perceptions of Florida’s CEOs that the state’s housing market is problematic for business.

Beginning in the early 1990s, Florida’s housing market expanded every year for more than a decade. In the past three years, however, the rate of new residential home construction has plummeted. New home starts fell to 230,000 in 2006, and then to 102,000 in 2007. Based on data through October, housing starts in Florida in 2008 will number about 70,000. The 2006-2008 falloff in residential construction is far greater than the two slumps Florida experienced in the 1980s.

However, there may be some light at the end of the tunnel. The views of Florida’s CEOs suggest that property values in Florida may be bottoming out. Fifty-eight percent of CEOs expect the state’s property values to stabilize in 2009. This is up from 45% percent in the previous survey.

The possibility that Florida property values may be approaching their low point finds some support from housing market indicators. The U.S. Census Bureau reported in October 2008 that, nationally, sales of new homes increased 2.7% in September over sales in August, while sales of existing homes increased 5.5%. Similarly, Standard & Poor’s/Case-Shiller Home Price Index showed in August that prices of existing homes were falling at a declining rate relative to prior months. Of course, these trends may change if the financial crisis continues and the economic downturn worsens.

CEOs hopeful, but preparing for the worst in 2009

CEO predictions about the national economy are mixed but on balance lean toward a negative assessment. More than one-fourth of CEOs (28%) expect improvement in the U.S. economy, a figure which is up from 17% last year. On the other hand, more than one-third of CEOs (39%) think that the U.S. economy will deteriorate. This is the same percentage as in the 2007-2008 survey, which was the highest percentage expecting the U.S. economy to deteriorate since the CEO Trends survey was launched in 2000.

CEO predictions about the national economy vary little across Florida industries. The only sectors where a majority of CEOs expect the U.S. economy to improve in 2009 are agribusiness and human resources. CEOs in most industries were divided more or less evenly between predictions that the U.S. economy either would stabilize or would deteriorate.

In general, Florida CEOs’ expectations for the national economy in the upcoming year appear to reflect considerable uncertainty. Hope is counterbalanced by doubt, and most business leaders are preparing for the worst.

Florida lines up with national indicators

Perceptions of national economic trends in this year’s Florida CEO Trends survey are consistent with state and national economic indicators. The graph above charts the year-to-year percentage change in gross domestic (national) and state product from 1998 through 2007. Nationally, growth began to slow in 2005, but the economy continued to expand, albeit at a lower level. In contrast, Florida’s economic growth accelerated through 2005 but then slowed sharply in 2006, with 2007 marked by no growth at all.

Employment numbers (see chart at left) show sharp reductions in Florida for 2008. Total non-farm employment growth slowed in the wake of the 2000-2001 recession and the 9-11 terrorist attacks, but then picked up again in 2003 and continued in high amounts through 2005, when more than 300,000 jobs were added to the state’s economy. Employment growth was not as great in 2006 but was still very strong, with a net gain of more than 200,000 jobs. In 2007, employment growth slowed dramatically to 38,600, and in 2008 Florida experienced an actual decline in total employment, losing almost 176,000 jobs. Predictably, the state’s unemployment rate rose sharply from 4% in 2007 to 6.6% in 2008, which is comparable to the national unemployment rate of 6.5%.

» Change in Gross Product (State vs. Domestic)		» Employment Total Non-Farm
Source: Bureau of Economic Analysis		Source: Bureau of Labor Statistics (preliminary estimate for September 2008)
Trends in economic growth and employment have brought Florida more into line with national economic conditions.

These trends in employment and economic growth have brought Florida more into line with national economic conditions than the state has been for almost a decade. From 2001 through 2005, annual nationwide growth in real gross domestic product was sluggish, ranging from a low of 1% to a high of 3.9%. Throughout this period, Florida’s growth rate exceeded the rate of growth nationally by at least one percentage point and often by two points or more. However, in 2006 and 2007, Florida’s economy began to deteriorate markedly. Confronted with a combination of declining home sales and property values, rising gas prices and weakening tourism, Florida’s explosive economic expansion could not continue without pause. CEO expectations and economic indicators both suggest that the slump will continue in 2009.

Slowing population growth creates economic drag

Another factor now exerting a drag on Florida’s economy is a slowdown in the state’s rate of population growth. This is normal; Florida’s population growth tends to rise and fall with the economy. But growth fuels construction, real estate sales and other industries, so recessionary slumps in population growth make Florida’s economic downturns all the more painful.

At least since the 1970s, national economic recessions have been associated with declines in Florida’s population growth. The chart on page 98 shows the annual net population increase in Florida from 1971 through 2008. Recessions occurred in 1973-1975, 1980-1982, 1990-1991 and 2001. Between 1971 and 2008, Florida’s growth ranged from a high of almost 500,000 new residents per year to a low of roughly 125,000 new residents.

» Population Annual Net Increase

Source: Bureau of Economic and Business Research; Florida Statistical Abstract

The most recent demographic estimates (adopted in October 2008) show projected growth in 2009 is 298,300.

The most recent growth surge began in 1993 as the U.S. economy emerged from the recession of 1990-1991. Over the course of the next 12 years, population growth in Florida ratcheted up, reaching almost 450,000 net new residents annually in 2004. By 2006, however, growth had dropped to about 330,000 net new residents per year.

Florida relies on a group of state economists and demographers to develop a consensus estimate of population growth and economic activity to forecast state revenues. Growth for 2007 was estimated to be 331,234 net new residents. The most recent demographic estimates and projections were adopted in October 2008 and show projected growth for 2008 to be 126,735, with growth of 74,686 projected for 2009.

In reality, though, population growth may be dropping even further and faster than has been estimated thus far. To gauge population trends, the Bureau of Economic and Business Research at the University of Florida monitors monthly changes in the number of electric hookups in the state. In September 2008, the number declined for the first time since BEBR began tracking electric service 40 years ago.

Demographers expect Florida’s population growth to rebound as the Baby Boom generation enters retirement. The oldest Boomers reached age 62 in 2008, and each year for at least a decade the number of Baby Boomers turning 62 will increase. In the near term, however, the anticipated tsunami of retirees may not materialize if the financial crisis and stock market declines of 2008 cause Boomers to delay retirement.

Taking aim at new domestic and international markets

Florida CEOs are responding to the state and national economic downturn in several ways. One is by expanding into new markets, both domestic and international. Half of Florida CEOs say that they will be expanding their businesses into new geographic areas in 2009. This is the same percentage observed last year.

Domestically, almost two-thirds (61%) of CEOs are targeting other parts of the United States outside of Florida. They are also expanding their activities in Florida.

Almost nine out of 10 (89%) CEOs consider the Florida market either extremely important (68%) or very important (21%) to their organization. The percentage rating the Florida market as extremely important is up from 64% in the 2007 survey and is the highest percentage ever reported for this question. More than half of CEOs in every industry except manufacturing, technology and transportation consider the Florida market extremely important.

Internationally, Florida’s CEOs are targeting Latin America and the Caribbean (20%), Europe (16%), Asia (15%), India (9%), China (8%), Canada (7%) and the Middle East (6%). Over one-third (36%) of CEOs report that international business will be a bigger part of their overall business activity in 2009 compared to 2008. Industries in which at least half of CEOs expect an increase in international business include business associations, business services, hospitality, insurance and professional services.

Energy costs impacting the bottom line

A second way Florida’s CEOs are responding to the economic slowdown is by addressing energy costs. Nine out of 10 CEOs (93%) report that increased costs for fuel and electricity have impacted their organization’s bottom line. About half (56%) say that the impact has been limited, while more than a third (37%) characterize it as significant. Significant impacts are reported by more than half of all CEOs in agribusiness, business services, education, energy, hospitality, human resources, media, restaurants, retail trade, transportation and wholesale trade.

Almost eight out of 10 (79%) CEOs are taking steps to minimize the impact of rising fuel and energy costs on their organizations. Cost-cutting actions include implementing energy conservation measures (56%); improving fuel management and logistics (35%); allowing work-from-home or telecommuting arrangements (26%); cutting back on air conditioning/heating (25%); changing fuel/energy purchasing practices (24%); consolidating office space or other logistical operations (24%); modifying vehicles (19%); and moving to a four-day workweek (11%).

Most of Florida’s CEOs support energy exploration in Florida’s coastal waters. One in five (21%) support such exploration unconditionally. However, most (59%) favor offshore drilling only as long as military test zones are protected and environmental standards are maintained. Another 14% are entirely opposed to such exploration even if fuel prices rise.

Tightening down on wages and health insurance costs

A third way Florida’s CEOs are navigating the economic downturn is by controlling costs for wages and health insurance. More than one in 10 (14%) CEOs say they will have a pay freeze. Up from 3% last year, this is by far the highest percentage indicating a wage freeze in any Florida CEO Trends survey. One in three (33%) don’t expect their company’s wages to keep pace with inflation. Only 8% expect wage increases that will exceed the rate of inflation.

Almost all (99%) of Florida’s CEOs offer healthcare insurance for their employees. About three-fourths (72%) of the CEOs’ organizations offer healthcare insurance only for their full-time employees, while the remainder (27%) offer insurance for their part-time employees as well.

Florida’s CEOs expect their organizations’ healthcare costs to rise significantly in 2009. More than half (56%) anticipate cost increases of at least 10%. One in 10 predicts cost increases of 20% or higher.

Many CEOs (48%) say that the portion of healthcare premiums paid by their employees will increase in 2009. This is up four percentage points from last year and is the highest percentage for this question since it was first introduced in 2006.

Florida’s CEOs report that their organizations are taking a number of actions to try and manage healthcare costs with more than half promoting healthy lifestyles and wellness programs and creating employee responsibility and cost awareness (see Managing Healthcare Costs).

Social and environmental leadership remain strong

As Florida’s CEOs navigate the economic downturn, they are not ignoring social and environmental responsibilities. More than half (51%) of the state’s CEOs report that their clients or customers have urged them to adopt green initiatives or environmentally friendly practices. CEOs have responded in a variety of ways, with energy efficiency and waste reduction programs topping the list. (See Sustainability)

Well over half (58%) of CEOs indicate that their companies have a point person for sustainability or Corporate Social Responsibility issues. This is up from 50% in 2007-2008. Furthermore, one in four (23%) companies have published a Corporate Social Responsibility report, either in addition to or as part of their annual report. Last year the figure was 15%.

The difficult economy may cause charitable and philanthropic donations to decline, but not by much if at all. Almost two thirds (61%) of CEOs say that their donations will be about the same in 2009 as they were in 2008. The remaining 40% are split about evenly between those who expect their donations to be more and those who expect them to be less in the upcoming year.

The Giving USA Foundation, which tracks charitable giving nationally, does not expect philanthropy to be impacted significantly by the economic downturn. Its report released in September 2008 on “Giving During Recessions and Economic Slowdowns” concluded that the rate of growth in charitable giving may slow during a recession, but giving still grows.

Economic change brings new priorities

Not surprisingly, as economic conditions have shifted, so have the priorities of Florida’s CEOs. Each year respondents are asked what in their view is the most pressing problem facing their organizations in Florida.

Over the past eight years, two issues have been cited repeatedly as Florida CEOs’ top concern. When the economy has been experiencing strong growth, the problem most often referenced by the CEOs of Florida’s largest companies was difficulty recruiting and retaining employees. This was the case in 2000 and 2001, and in the three surveys between 2004 and 2006.

On the other hand, in 2002 and 2003 when Florida was reeling from the effects of 9-11, the biggest concern of CEOs was the uncertain economic outlook. In 2002, economic uncertainty was cited by 42% of CEOs as the most pressing problem facing their organizations in Florida. A year earlier, economic uncertainty had hardly been mentioned at all, rating concern among only 3% of the CEOs interviewed. In the 2003 survey, the uncertain economic outlook was again the problem cited most often, but the frequency fell to 32%.

Over the course of the past two years, uncertainty about the economic outlook has returned to the top of the list. In the 2007 survey, uncertainty about the economic outlook was cited most frequently (41%), but it was followed closely by difficulty recruiting and retaining employees (37%). In this year’s survey, the percentage citing the economic outlook rose to 62%, while recruitment and retention fell to 10%.

CEOs adapting; looking past the downturn

This year’s findings from the Florida CEO Trends survey are more pessimistic than those from any previous year, but they are not without positive implications. Led by their CEOs, Florida businesses are adapting to the state’s economic challenges. They are maintaining a strong focus on the Florida market as they expand into other markets in the U.S. as well as internationally. Business leaders are keeping wage increases in check and are also using a variety of approaches to contain their costs for employee health insurance. At the same time, energy costs are being addressed with conservation, fuel efficiency and other initiatives with important environmental benefits.

Moreover, history shows that economic downturns in Florida last only about a year, and they are followed by much longer periods of sustained growth. Florida’s prosperity is enduring because it is supported by economic and demographic trends that are national and international in scope and momentum. Industry will continue to move to the Sun Belt; Florida will continue to attract opportunity-seeking people from other nations; and travel and recreation will continue to be a priority in the lifestyles of advanced nations. Although Florida’s population growth has slowed in the past two years — as is normal in economic downturns — just over the horizon is a new wave of growth that will come as the huge generation of Baby Boomers enters retirement.

About the Author: Lance deHaven-Smith is a professor in the Reubin O’D. Askew School of Public Administration and Policy at Florida State University. A former president of the Florida Political Science Association and the author of 15 books, one of which won the Manning Dauer Prize for scholarship from the University of Florida, Professor deHaven-Smith has written and conducted research on a wide range of topics, including survey research, Florida growth and development, and national, state and local government.

Other Contributors Ginger Broslat, John Dunn, Christine Jordan Sexton, Janet Ware and Jeff Zbar